ECONOMICS Trump, China, the WTO and world trade

by Colin Teese

News Weekly, June 30, 2018

My last article in News Weekly was intended as a wake-up call about what was happening before our eyes in China.

Effectively, what we have before us is a government, committed to communism, indifferent to Western values and maneuvering itself into the position of the most powerful economic and (perhaps) political force on the planet.

Yes, I thought so too. But, no, it is the World Trade Organisation's headquarters in Geneva.

As far as can be determined the overall Western response to this development is either to pretend it will somehow go away or, frantically, to agonise over what might be done about it.

The one exception appears to be the response of the President of the United States. Donald Trump’s actions have been variously condemned or disparaged by orthodox Western opinion, both inside and beyond the United States.

Mr Trump’s detractors insist he is trying to tear down the “rules-based” system that had been carefully built up in the West since the end of World War II. In the process, it is said, we are at risk of losing all of the enormous benefits that have accrued, not merely to the West but perhaps to the entire planet.

Can such a criticism justifiably be leveled at the U.S. President?

I think not. Which is not to say that all of his actions thus far are beyond criticism. I believe his tax cuts to big business were unwise, as are similar measures being proposed for Australia.

But when it comes to a reassessment of the way the world economy is operating in the context of an emerging China, Mr Trump appears to have a better grip on how things are changing and what might be the appropriate responses, than many of his critics.

He may not have a considered understanding of the difference, in economic terms, between a Western-style capitalist government and one guided by communists. In that respect he may not be alone. I, for one, am not sure I do. Certainly, I have never understood the approach of communist governments to economics.

For example, whatever happened to the ideal of “From each according to his ability, to each according to his need”, (popularised by Karl Marx, though scarcely original to him: see 2 Thessalonians 3:10). We never heard much about that in the old Soviet Union and the same goes for modern China.

Not that the two experiments in communist government bear much relationship to each other. The Soviets failed miserably, while China is succeeding spectacularly.

Mr Trump, I suspect, neither knows nor cares about any of this. What he does know and believe is that what is happening is not delivering a satisfac­tory outcome for U.S. Allies and potential enemies alike, he believes, are taking advantage of the U.S., and he is calling them to account. He is determined to turn all this around.

From his perspective the relative merit of existing rules, institutions or ideologies are evaluated solely on the basis of whether they are compatible with U.S. interests.

President Trump is not the first U.S. leader to think in these terms. Back in 1971, President Richard Nixon, based on the advice of his secretary of the Treasury John Connally, demolished the Bretton Woods agreement. Connally persuaded him that continuing it would allow the Europeans to undermine U.S. financial interests.

Remember, the Bretton Woods agreement was created, essentially by the United States, as part of a plan to stabilise international economic activities after World War II.

Paul Volcker, later chairman of the U.S. Federal Reserve Bank, described President Nixon’s actions on Bretton Woods as “balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy”, and “opt[ing] for the latter”. He further declared that a “controlled disintegration in the world economy … [was] a legitimate objective for the 1980s”.

It is naïve in the extreme to imagine that any U.S. political leadership would continue to support any system (rules-based or otherwise) or any institution that it believes no longer serves U.S. interests.

Many watching from the sidelines (and including some of his closest advisers) lament what they see as Mr Trump taking the wrecking ball to one of the United States’ most treasured belongings – free trade and the World Trade Organisation (WTO). They would do well, however, to reflect on the positions taken, in similar situations by earlier presidents and their advisers.

Mr Trump clearly has lost confidence in the instruments and institutions currently managing world trade, and from that perspective is making appropriate policy adjustments in line with precedents set earlier.

At the beginning of June, a U.S. team of trade negotiators visited China. They carried with them a parcel of “demands” that they hoped would provide a basis for resolving their trade dispute with China. Initially, it seemed that there were prospects of a successful outcome on at least some issues.

But it became clear that one of their claims was for a restructuring of the Chinese economy, presumably to make it more like U.S. capitalism, the Chinese quickly terminated the talks.

Which is hardly surprising. Imagine what would have been the U.S. response if China had insisted on “structural changes to the U.S. economy”. This is not to deny that the U.S. has genuine complaints, especially about the most contentious issues.

In practical terms, one of the deepest U.S. concerns relates to transfer of technology: in particular, it is maintained, no doubt correctly, that China has stolen technology from the U.S. It is also true that China is highly selective about which U.S. tech products it allows into China, as compared with what happens in the opposite direction.

While certain details associated with these problems might be tidied up, it is hard to see the overall problem being settled to the satisfaction of the U.S.

So how might this all play out in terms of putting up trade barriers? Mr Trump believes that he has the trump card: the $US200 billion trade deficit with China.

That being so, the simple assumption is that Mr Trump’s Administration will be free to take whatever retaliatory actions against Chinese trade that it deems appropriate, putting aside WTO commitments for which, so far, the U.S. President has shown scant respect.

Previous administrations have been indifferent to this development on the basis that the United States has benefitted from cheap imports. Whatever the merits of this argument,

Mr Trump believes, correctly, that China is well positioned to buy more of its import needs from the U.S. It should do so for the sake of its relationship with the U.S., even if this means restricting imports from some of its other trading partners.

But supposing he follows that course, what might be China’s reaction?

China has said, in effect, that restrictions will be met with restrictions: in particular, it has foreshadowed curtailing the import of U.S. agricultural products. Such a response would harm Mr Trump in his heartland support base.

Is the U.S. in a position to curtail Chinese manufactured imports? Perhaps not as much as we might imagine. China could simply direct more of its manufactures denied a market in the U.S. towards its domestic consumers. Indeed, it is already moving in that direction as a part of national policy.

We shall have to wait and see how it plays out, recognising that neither side will pay particular regard to their res­pective obligations under the WTO.

Indeed, whatever actions and counteractions the two parties undertake will almost certainly contravene some of their obligations in terms of the WTO. Given that these are the world’s two largest trading nations, exchanging illegal measures would only further undermine what is left of the WTO’s credibility. Other commitments concluded bilaterally would also be under threat.

Whatever else might be said, we can applaud Mr Trump’s consistency in this matter. His trade policy is aimed exclusively against countries that enjoy a trade surplus with the U.S. Indeed, this is one of the aspects of the current management of international trade with which the U.S. President takes strong issue.

Mr Trump’s approach is controversial, both within his own closely held support base and the wider U.S. community. Among the US elites, there is almost universal support for the community benefits of “free trade”. Curiously, this also holds for Australian business and government, both of which deplore deficit spending.

Conveniently, they all overlook the fact that a trade deficit is a contributing factor to an overall deficit.

Against this view, Mr Trump is a model of consistency. For example, Australia has been excluded from his steel and aluminium tariffs, presumably because the U.S. has a $25 billion trade surplus with us. Trump’s trade rebalancing exercise is ironically focused on geopolitical allies of the U.S.: Canada, Europe and Mexico among others. All are beginning to talk in terms of “war” with the U.S. over trade.

The most interesting aspect in this is that all are lined up with China on trade, but are strategic allies of the United States in geopolitics. This is a bizarre situation. Aligned with China on trade and against it on geopolitics.

International tensions of this kind, pulling in two different directions, surely have no precedent in modern history. Given its own uncomfortable situation, Australia might sympathise with them. China is our most important trading partner and yet we are wary of it as a military threat.